What Happens if the Home Equity Appraisal Comes in Too Low?

A home appraisal serves a variety of purposes. Sellers order appraisals to get a sense of how much a home can sell for. Buyers and homeowners need them to get a purchase or refinance loan. Lenders use them to determine whether a home is sufficient collateral for a mortgage. You should be ready to renegotiate the sales price, pitch in more money to close, or walk away from the deal if the home equity appraisal comes in too low.

Home Equity and Financing

Equity is the difference between the mortgage debt and a home's value. A home must have sufficient equity for a lender to recover payment. In general, a home with good equity -- 20 percent or more -- has less risk of default. Homes with minimal to no equity have an increased chance of delinquency and foreclosure. To ensure it can recover its losses, a lender requires a certain amount of equity when making a loan -- usually at least 3.5 percent to 20 percent. A home appraisal gives the lender a thorough look at the home, inside and out, and a basis for the home's value.

Appraisals for Buyers

An appraisal can help a homebuyer gauge whether a property is worth the price. Lenders require buyers who seek financing to obtain a home appraisal. Because sufficient financing is usually a condition of buying a house, and an appraisal is a condition for financing, buyers need an appraisal at the right value. If an appraisal comes in too low, there won't be enough equity in the home to get the financing they need. For example, if a buyer wants to buy a $400,000 home but the appraised value comes in $20,000 short, the buyer must make up for the shortfall in equity. This may involve increasing the down payment amount by $20,000, asking the seller to lower his price by $20,000, or something in between.

Appraisal for Refinances

Most refinances, with the exception of expedited "streamline" refinances, require an appraisal. Obtaining a second mortgage, such as a home equity loan or line of credit -- HELOC -- also requires an appraisal. If a home equity or refinance appraisal comes in too low, the lender may deny the loan or require you to contribute money to the transaction to make up for the shortfall. If the new loan covers closing costs, you may have to pay the fees out of pocket to close the gap between appraised value and the maximum loan amount your lender can finance.

When It Doesn't Go Your Way

You can appeal a low appraisal if you can prove that the appraiser undervalued the house. Home equity loans and HELOCs may involve an electronic appraisal, which may miss key property or comparable data. Your lender may let you pay for a walk-through appraisal, which is more thorough. If you notice that the appraisal contains errors, such as fewer rooms or square footage, or that the appraiser omitted comparable homes of higher value, you can present the information to the lender and appraiser for re-evaluation. In the event you can't appeal the value, the seller won't lower the price, or you can't chip in more money upfront, you may have no choice but to back out of the transaction.